Passive income… a sure way to wealth according to many influencers. But is passive income really passive? Can you just automate everything, sit and enjoy the money rolling in? In this post, I will tackle exactly these questions. While passive income is one of the best paths to building wealth, there are numerous misconceptions to dispel.

What is Passive Income?

You earn passive income from something that does not need your active participation. Examples include writing books, blogging or investing in securities that earn you income.

The IRS defines passive income as something earned from spending less than 500 hours a year or 10 hours a week. As we see, even the IRS thinks one has to do some work to earn passive income.

The opposite is active income or also called earned income. You must work some hours and complete certain work to earn a salary.

Passive Income Misconceptions

So, what are the misconceptions about passive income? Actually, there are many, if you ask me.

1. Passive Income Requires Little Effort

First, passive income requires a large upfront investment in exchange for little work later. Usually, it takes a lot of effort at first with no visible results for a long time. You may even wonder why you are doing it. Even so, you still have bills to pay. If you do not have income or savings, building passive income becomes tough. For this reason, many entrepreneurs do it as a side project or go into debt.

Take books for instance. Many influencers casually tell you: “Oh yeah, just write an ebook.” But, do you know how difficult it is to stand out in a crowded marketplace with your work? Many writers say that they had to produce many books to make a decent living. It is doable, but you have to be realistic about it.

Moreover, if others can replicate your ideas, the passive income from your book will dwindle fast. For instance, take books on passive income ideas. There were some 10 years ago. But, what about now? There are so many of them, I do not even know which one to pick.

Large Upfront Investments

Other ideas may need large sums of money that are out of reach for many. Take real estate which is promoted as the holy grail of passive income. I do not dispute that there are many benefits to real estate investing. But, do not kid yourself that real estate is a passive endeavor. Actually, it is far from it.

First, you will need to spend a lot of time to learn how the real estate market works and how to do due diligence. It takes a lot of skill to find an undervalued property for flipping or a great rental investment. But most importantly, investing in real estate requires large sums of money upfront.

Unfortunately, the effort does not stop there for rentals. You will have to do upkeep work, such as repairs and maintenance. But, the worst part is dealing with tenants. What if your tenant destroys your property or refuses to pay rent? Of course, you can hire a property manager. But, this does not come free and will shave off about 10% off your rental income.

Another common passive income idea is investing for dividends. But, you must earn money first from somewhere before investing.

2. A Passive Income Idea Will Succeed

Another misconception is that your passive income idea will take off for sure. Or so do influencers tell you in their promotional videos. Unfortunately, many businesses fail within 10 years. For instance, only 35% of businesses that opened in 2013 survived today. You will need to be realistic about it and pivot fast if you see things are not panning out as you expected.

3. Passive Income is Forever

The next misconception about passive income is that it is forever. Unfortunately, it is not. And the real killer of passive income is competition.

Earlier, we covered an example of writing books. The same thing applies to other situations. For instance, take stock photography, which is something I am familiar with. I started doing stock photography back in 2015 as a side hustle. It involves taking photos and uploading them for licensing on different websites.

The first few years were great. But, something changed around 2020. The stock photography market matured, got too saturated. Too many photos are chasing the same number of buyers. Also, many other sites popped up that offer photos and even videos for free. In response, stock photo websites lowered contributor payouts.

4. No Work Needed Afterwards

And this leads to misconception number four: you won’t have to work even after automating everything. That is a complete myth. It is almost for sure that you will have to spend time maintaining your passive income. Often, you will have to pivot, innovate and change. All this will cost time and money.

For example, take YouTube. I can attest that it is not as easy as many YouTubers will tell you. Let’s say you succeeded and your channel has 1 million subscribers. This does not guarantee that you are set for life. If any channel goes stale, many negative consequences await. YouTube may stop promoting videos and your channel altogether. So, you will need to continue working on it.

Moreover, Google likes fresh content. Content older than 3-4 years will get lost in search results. I also read that there is a risk of demonetization if you stop uploading videos altogether.

Key Takeaways for Passive Income

It seems that passive income became a buzzword that lost its meaning. But, what should we do? Is it worth pursuing passive income ideas? Here are a few things to keep in mind.

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Do Extensive Research

Of course, it is worth it. But, do your research, play around with your ideas before committing. Certain passive income ideas may need large capital expenditures and lots of time. Think about it on realistic terms or you will end up wasting resources. It is a good idea to develop passive income ideas as side projects with active income behind your back. Once you test your idea and see that it works, it could be time to go all in.

Do Not Fall for Course Trap

Finally, do not fall for course trap promoted by influencers. If you a see a course on something, the opportunity has likely passed by now.

For example, take dropshipping. Dropshipping involves selling goods manufactured and shipped by someone else on your behalf on various website, including Amazon. I have not seen any courses on dropshipping before 2020. But now? They are all over the place. Likely, those who sell you their course will make more money than you actually earn from dropshipping.

I am not saying that it’s impossible to succeed in dropshipping. But, it is probably much harder today. Many manufacturers can produce the same products for anyone. You will have to constantly change and adapt.

It takes a lot of creativity and being different to build a successful passive income. This has never been easy, but it is doable.